Question: Don Facundo Bacardy Maso founded the original Bacardi rum business

Don Facundo Bacardy Maso founded the original Bacardi® rum business in Cuba in 1862. The following information is excerpted from Bacardi Corporation’s annual report for the year ended December 31, Year 2. Bacardi’s effective tax rate was 17% in Year 2.
The company follows the last-in, first-out (LIFO) method of determining inventory cost. The LIFO method is considered by management to be preferable because it more closely matches current costs with current revenues in periods of price level changes. Under this method, current costs are charged to costs of sales for the year.
In Year 2, LIFO liquidation was caused primarily by a substantial reduction during the year in [the inventory of] molasses (the major raw material). This LIFO liquidation, which resulted in cost of products sold being charged with higher inventory costs from prior years, caused a decrease in Year 2 net income of approximately $1,400,000 or $0.14 per share.
LIFO inventories at December 31, Year 2 and Year 1 were $51,892,000 and $53,812,000, respectively, which is approximately $700,000 and $20,800,000 less than replacement cost at those dates.
In accordance with generally recognized trade practices, inventories of distilled spirits in bonded aging warehouses have been included in current assets, although the normal aging period is usually from one to three years.
Ending inventories consist of the following:
Cost of goods sold and net income (after tax) during Year 2 were $65,374,000 and $45,568,000, respectively.

1. Compute the cost of goods manufactured (fully aged rum) during Year 2. Without using the LIFO reserve information, compute the finished goods inventory turnover (the number of days from inventory completion until its sale) and the work-in-process inventory turnover (the number of days the inventory is in the production cycle). Is the difference between the two inventory turnover ratios consistent with the nature of Bacardi’s business? Explain.
2. On the basis of available information, estimate Bacardi’s net income if the company had used FIFO during Year 2. By comparing the reported LIFO income with your estimate of FIFO income, what do you learn about the business conditions Bacardi faced during Year 2?
3. Using all available information, compute a total inventory turnover measure (expressed in number of days). Does your estimate of inventory turnover capture Bacardi’s “true” physical turnover (based on what you know about the business)? Explain. If it does not capture the true physical turnover, provide possible reasons. Be specific.

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  • CreatedSeptember 10, 2014
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